More Bad News on Financial Reform

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Even more bad news on Financial Reform. The main players in the negotiations between the House and Senate versions are Chris Dodd, Barney Frank and Timothy Geithner.

The Wall Street Journal:

As a result, people who know them say, they are likely to show willingness to negotiate on parts of the bill they don't view as core, while being intractable on pieces they view as elemental.

That could mean easing provisions with strict limits on derivatives trading, proposed restrictions on fees banks charge retailers and even agreeing to allow auto dealers to be exempt from new lending rules.

Nice huh? Negotiations are supposed to be between the two houses of Congress only. The entire list of conferees is front loaded with corporate representatives. Not a single Congressional representative who was pushing for real reforms, such as the Volcker rule, Glass-Steagall, stronger derivatives reform was chosen as a conferee.

"What we're focused on is making sure that in the conference process the president's core objectives are met, and there are going to be other things that are done in that process along the way that are not part of those core sets of objectives, and we think we can work those out," said Assistant Treasury Secretary Michael Barr, a close aide to Mr. Geithner.

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Banks lobbying to remove another reform out of bill

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This time it's a type of CDO, TruPS:

Riverside, which started in a trailer in 1982, bought collateralized debt obligations made up of TruPS as it grew to 65 branches and $4.8 billion assets. When real estate soured and lenders racked up loan losses, Riverside and about 400 of its peers suspended interest payments on their TruPS, causing the CDOs to default or lose value and inflicting more harm on an industry suffering from the worst economy since the 1930s.

“The industry was self-financing, using loopholes in rules,” said Joseph Mason, a professor of finance at Louisiana State University in Baton Rouge. “Regulators weren’t keeping track of ownership of the capital, which became more difficult to do with the use of CDOs. The losses fed on each other.”

Collins Amendment

Riverside, based in Fort Pierce, Florida, was one of almost 1,400 U.S. lenders that had issued $149 billion of trust preferreds by the end of 2008, according to the Federal Reserve Bank of Philadelphia. About $45 billion of CDOs filled with such TruPS were created by the time the market for securitized debt shut down that year, according to PF2 Securities Evaluations, a New York-based company that helps banks and funds evaluate CDOs.

Congress may end the use of TruPS as capital, forcing banks that issued them to replenish their coffers. Banks are lobbying to remove a provision barring their use that was introduced by Maine Republican Susan Collins and included in the financial reform bill passed by the Senate last month. The Senate version is being reconciled with one passed by the House of Representatives in December that doesn’t include a ban.

This is just unbelievable. It's so clear these various derivatives are the things which created systemic risk, contagion within the financial sector in the first place as well as enabled banks to practice unsound banking....

yet here we are, with the very swiss cheese, weak Financial Reform bill going to be ripped further asunder after it passed and it appears derivatives are at the top of that list.